Friday, 10 July 2015

No daylight between Greek and Troika proposals

Naftemboriki has published the new Greek proposals submitted by the Greek government yesterday as loan conditionality for a third Memorandum, comprising a three-year loan of € 51 billion.

I have implemented a line-by-line comparison of the Greek proposal of July 9 and the Troika proposal of June 26th and have concluded the following:

The Greek proposal is literally a copy-paste exercise. There is almost no difference between the two versions. In some cases, the Greek proposal exceeds the original Troika proposals with more favourable policy measures.

The Greek side has fully adapted the tax and revenue proposals submitted by the Troika for VAT, pensions, etc.

It is impossible to see how SYRIZA-ANEL can pass these measures that they have just campaigned against in a Referendum, condemning the Troika as being pillagers, blackmailers and terrorists.

It is impossible to see how the 61.3% of the Greek population who voted “no” on this Referendum, which asked them specifically if they accepted an earlier version of these proposals, can accept this proposal.

Nonetheless, the comments by SYRIZA MPs and Ministers shown on ERT (the state broadcaster) this morning shows a certainty that SYRIZA will pass them, authorising the Greek Prime Minister to negotiate on this basis.

Last week’s Referendum has seriously shaken European creditor trust in SYRIZA. Even despite these proposals, it is difficult to see how they can be implemented or accepted without real guarantees.

The macroeconomic and fiscal situation in Greece has deteriorated still further, so it is not certain that even these measures are sufficient.

I would like to specifically note that there is no mention of debt relief in the SYRIZA proposals. But SYRIZA MPs interviewed this morning entering Parliament are expressing satisfaction that debt relief is forthcoming.

A line-by-line comparison of the two versions follows. You can find the original documents here:

Surplus Targets

The new fiscal path is premised on a primary surplus target of (1, 2, 3), and 3.5 percent of GDP in 2015, 2016, 2017 and 2018.

The new fiscal path is premised on a primary surplus target of 1, 2, 3, and 3.5 percent of GDP in 2015, 2016, 2017 and 2018.

This does give Greece partial “breathing room” in 2015-2016 with a lower primary surplus target compared with the laws in effect. However, it will not be enough for meaningful debt reduction and imposes a “performance cap” that most governments will struggle to meet.

VAT Reform

Full agreement with the Troika proposal of June 26th.

Greek Proposal July 9th

Troika Proposal June 26th

The new VAT system will: (i) unify the rates at a standard 23 percent rate, which will include restaurants and catering, and a reduced 13 percent rate for basic food, energy, hotels, and water (excluding sewage), and a super-reduced rate of 6 percent for pharmaceuticals, books, and theater; (ii) streamline exemptions to broaden the base and raise the tax on insurance; and (iii) Eliminate discounts on islands, starting with the islands with higher incomes and which are the most popular tourist destinations, except the most remote ones. This will be completed by end-2016, as appropriate and targeted fiscally neutral measures to compensate those inhabitants that are most in need are determined. The new VAT rates on hotels and islands will be implemented from October 2015.

The new VAT system will: (i) unify the rates at a standard 23 percent rate, which will include restaurants and catering, and a reduced 13 percent rate for basic food, energy, hotels, and water (excluding sewage), and a super-reduced rate of 6 percent for pharmaceuticals, books, and theater; (ii) streamline exemptions to broaden the base and raise the tax on insurance; and (iii) eliminate discounts, including on islands.

There is one small difference on the phasing of the 30% VAT reduction on remote islands.

Fiscal Structural Measures – Corporate Tax

Full agreement with 26 June proposal. We understand that the corporate tax rate will be raised to 28% (a 2% difference) and a 100% pre-payment required (offset against the current 85% prepayment). There is a one-year difference in the individual corporate rate

Greek Proposal July 9th

Troika Proposal June 26th

take measures to increase the corporate income tax in 2015 and require 100 percent advance payments for corporate income and gradually for individual business income tax by 2017

take measures to increase the corporate income tax in 2015 and require 100 percent advance payments for corporate income as well as individual business income tax by end-2016;

I believe the Troika will require adjustments of the individual corporate tax rate by 2016, or perhaps even this year with an immediate law.

Fiscal Structural Measures – Farmers, Solidarity, Subsidies

Full agreement with June 26 proposal.

Greek Proposal July 9th

Troika Proposal June 26th

phase out the preferential tax treatment of farmers in the income tax code by 2017; raise the solidarity surcharge; abolish subsidies for excise on diesel oil for farmers and better target eligibility to halve heating oil subsidies expenditure in the budget 2016;

eliminate the preferential tax treatment of farmers in the income tax code; raise the solidarity surcharge;

abolish subsidies for excise on diesel oil for farmers and better target eligibility to halve heating oil subsidies expenditure in the budget 2016;

Farmers (some of them) have long been preferentially-treated political clients, given their disproportionate political role in rural areas. Given the outsized support they receive from the Common Agricultural Policy, a tax harmonization is needed. The solidarity tax affects everyone with certain income, and will increase the solidarity surcharges, probably from EUR 2000 monthly income and above.

Fiscal Structural Measures – Property Tax

Full agreement with Troika proposal.

Greek Proposal July 9th

Troika Proposal June 26th

in view of any revision of the zonal property values, adjust the property tax rates if necessary to safeguard the 2015 and 2016 property tax revenues at €2.65 billion and adjust the alternative minimum personal income taxation

in view of any revision of the zonal property values, adjust the property tax rates if necessary to safeguard the 2015 and 2016 property tax revenues at €2.65 billion and adjust the alternative minimum personal income taxation

Although SYRIZA came into power promising to eliminate the hated “ENFIA” tax, it is apparent that whether this is called ENFIA or something else, the tax on property remains in place.

Fiscal Structural Measures – Shipping Tax

Full agreement with Troika proposal.

Greek Proposal July 9th

Troika Proposal June 26th

increase the rate of the tonnage tax and phase out special tax treatments of the shipping industry

increase the rate of the tonnage tax and phase out special tax treatments of the shipping industry.

This tax is controversial and probably reflects competitive pressure on Greece from Germany and other shipping competitors. The result will be to move shipping away from the Greek flag to other offshore jurisdictions such as Marshall Islands (United States), Panama, Liberia, Cyprus, Jersey, Guernsey, etc. There is a popular understanding that Greek shipowners are tax free, but it should be remembered that the vast majority of shipowners do no shipping within Greece: 100% of their cargoes and ships never dock at a Greek port. The first signs from last week already show that there is a rush for other flags by Greek shipowners.

Fiscal Structural Measures – Healthcare

Full agreement with Troika proposal

Greek Proposal July 9th

Troika Proposal June 26th

On health care, effective as of July 1, 2015, (i) re-establish full INN prescription, without exceptions, (ii) reduce as a first step the price of all off-patent drugs to 50 percent and all generics to 32.5 percent of the patent price, by repealing the grandfathering clause for medicines already in the market in 2012, and (iii)) review and limit the prices of diagnostic tests to bring structural spending in line with claw back targets; and (iv) collect in the full the 2014 clawback for private clinics, diagnostics and pharmaceuticals, and extend their 2015 clawback ceilings to 2016.

On health care, effective as of July 1, 2015, (i) re-establish full INN prescription, without exceptions, (ii) reduce as a first step the price of all off-patent drugs to 50 percent and all generics to 32.5 percent of the patent price, by repealing the grandfathering clause for medicines already in the market in 2012, and (iii)) review and limit the prices of diagnostic tests to bring structural spending in line with claw back targets; and (iv) collect in the full the 2014 clawback for private clinics, diagnostics and pharmaceuticals, and extend their 2015 clawback ceilings to 2016.

This clause aims to reduce the costs of healthcare by increasing the share of generic pharmaceuticals (which are cheaper than ones under patent) and implementing stricter tests for clawbacks and diagnostics. It is a logical step, depending on how it is implemented. The SYRIZA health minister this week condemned the clawback measures and stated they would never be implemented.

Fiscal Structural Measures – Military Procurement

€300 million difference with Troika proposal, falling to € 200 million in 2016. SYRIZA agrees to reduce headcount and procurement costs.

Greek Proposal July 9th

Troika Proposal June 26th

reduce the expenditure ceiling for military spending by €100 million in 2015 and by €200 million in 2016 with a targeted set of actions, including a reduction in headcount and procurement;

Reduce the expenditure ceiling for military spending by €400 million with a targeted set of actions, including a reduction in headcount and procurement;

ANEL Minister of Defence Panos Kammenos has suggested he will not accept any military cutbacks.

Fiscal Structural Measures – Media

Full agreement with Troika proposals

Greek Proposal July 9th

Troika Proposal June 26th

introduce tax on television advertisements;

announce international public tender for the acquisition of television licenses and usage related fees of relevant frequencies; and

introduce tax on television advertisements;

announce international public tender for the acquisition of television licenses and usage related fees of relevant frequencies;

It should be emphasised that most if not all Greek private TV channels are broadcasting without a license, and are owned by individuals that have conflicting interests and in the past have had tangled relationships with public procurement. Re-tendering the license is an important and necessary step. However, it should also be remembered that the recession has reduced TV advertising anyway, while most stations are showing a financial loss. The ability to collect this tax, therefore, is in doubt.

Pension Reform

Full agreement with Troika proposals.

Greek Proposal July 9th

Troika Proposal June 26th

The Authorities recognise that the pension system is unsustainable and needs fundamental reforms. This is why they will implement in full the 2010 pension reform law (3863/2010), and implement in full or replace/adjust the sustainability factors for supplementary and lump-sum pensions from the 2012 reform as a part of the new pension reform in October 2015 to achieve equivalent savings and take further steps to improve the pension system.

Effective from July 1, 2015 the authorities will phase-in reforms that would deliver estimated permanent savings of ¼-½ percent of GDP in 2015 and 1 percent of GDP on a full year basis in 2016 and thereafter by adopting legislation to:

· create strong disincentives to early retirement, including the adjustment of early retirement penalties, and through a gradual elimination of grandfathering to statutory retirement age and early retirement pathways progressively adapting to the limit of statutory retirement age of 67 years, or 62 and 40 years of contributions by 2022, applicable for all those retiring (except arduous professions, and mothers with children with disability) with immediate application;

· adopt legislation so that withdrawals from the Social Insurance Fund will incur an annual penalty, for those affected by the extension of the retirement age period, equivalent to 10 percent on top of the current penalty of 6 percent;

· integrate into ETEA all supplementary pension funds and ensure that, starting January 1, 2015, all supplementary pension funds are only financed by own contributions;

· better target social pensions by increasing OGA uninsured pension;

· Gradually phase out the solidarity grant (EKAS) for all pensioners by end-December 2019. This shall be legislated immediately and shall start as regards the top 20% of beneficiaries in March 2016 with the modalities of the phase out to be agreed with the institutions;

The Authorities recognise that the pension system is unsustainable and needs fundamental reforms. This is why they will implement in full the 2010 pension reform law (3863/2010), and implement in full or replace/adjust the sustainability factors for supplementary and lump-sum pensions from the 2012 reform to achieve equivalent savings and take further steps to improve the pension system.

Effective from July 1, 2015 the authorities will phase-in reforms that would deliver estimated permanent savings of ¼ - ½ percent of GDP in 2015 and 1 percent of GDP on a full year basis in 2016 and thereafter by adopting legislation to:

create strong disincentives to early retirement, including the adjustment of early retirement penalties, and through a gradual elimination of grandfathering to statutory retirement age and early retirement pathways progressively adapting to the limit of statutory retirement age of 67 years, or 62 and 40 years of contributions by 2022, applicable for all those retiring (except arduous professions, and mothers with children with disability) with immediate application;

 adopt legislation so that withdrawals from the Social Insurance Fund will incur an annual penalty, for those affected by the extension of the retirement age period, equivalent to 10 percent on top of the current penalty of 6 percent;

 integrate into ETEA all supplementary pension funds and ensure that, starting January 1, 2015, all supplementary pension funds are only financed by own contributions;

 better target social pensions by increasing OGA uninsured pension;

 Gradually phase out the solidarity grant (EKAS) for all pensioners by end-December 2019. This shall start immediately as regards the top 20% of beneficiaries with the modalities of the phase out to be agreed with the institutions;

SYRIZA has campaigned heavily on not reducing pensions. The Troika proposal was to reduce the EKAS pensions on higher pension categories. The new Greek proposal states exactly the same. A new minimum social insurance is to be introduced in the future.

Pension Reform - Sustainability

Full agreement with Troika proposals.

Greek Proposal July 9th

Troika Proposal June 26th

Moreover, in order to restore the sustainability of the pension system, the authorities will by 31 October 2015, legislate further reforms to take effect from 1 January 2016; (i) specific design and parametric improvements to establish a closer link between contributions and benefits; (ii) broaden and modernize the contribution and pension base for all self-employed, including by switching from notional to actual income, subject to minimum required contribution rules; (iii) revise and rationalize all different systems of basic, guaranteed contributory and means tested pension components, taking into account incentives to work and contribute;

Moreover, in order to restore the sustainability and improve the structure of the pensions system, the authorities will by 31 October 2015, legislate further reforms to take effect from January 1, 2016 (i) specific design and parametric improvements to establish a closerlink between contribution and benefits; (ii) broaden and modernize the contribution and pension base for all self-employed, including by switching from notional to actual income, subject to minimum required contribution rules; (iii) revise and rationalize all different systems of basic, guaranteed contributory and means tested pension components, taking into account incentives to work and contribute; (iv) the main elements

I have split this out to emphasize a very positive point: that the pension base for all self-employed will switch from notional to actual income. This is an extremely important point to rationalise TEBE / OAEE insurance, which is based on lump-sum contributions rather than indexed to actual salaries.

Public Administration

There is no original Troika proposal on this part.

Greek Proposal July 9th

Troika Proposal June 26th

introduce a new permanent mobility scheme applied by Q4 2015. The scheme will promote the use of job description and will be linked with an online database that will include all current vacancies. Final decision on employee mobility will be taken by each service concerned. This will rationalize the allocation of resources as well as the staffing across the General Government.

We remind readers that SYRIZA has condemned the mobility scheme as being unconstitutional and illegal. SYRIZA has re-employed at least 5,000 state workers placed in the older mobility scheme. If implemented properly, this is a positive step.

Anti-Corruption

Full agreement with Troika proposals.

Greek Proposal July 9th

Troika Proposal June 26th

Publish a revised Strategic Plan against Corruption by 31 July 2015. Amend and implement the legal framework for the declaration of assets and financing of the political parties and adopt legislation insulating financial crime and anti-corruption investigations from political intervention in individual cases.

Publish a revised Strategic Plan against Corruption by 31 July 2015. Amend and implement the legal framework for the declaration of assets and financing of the political parties and adopt legislation insulating financial crime and anti-corruption investigations from political intervention in individual cases.

This will be a very positive step if it is implemented properly.

OECD Cooperation

There is no exact original Troika proposal on this part.

Greek Proposal July 9th

Troika Proposal June 26th

Moreover, in collaboration with the OECD, the Authorities will:

· Strengthen controls in public entities and especially SOEs. Empower the Line Ministries to perform robust audit and control inspections to supervised entities including SOEs.

· Strengthen controls and internal audit processes in high spending Local Government Institutions and their supervised legal entities.

· Strengthen controls in public and private investment cases funded either by national or co-funded by other sources, public works and public procurement (e.g. in health sector, SDIT).

· Strengthen transparency and control processes and skills in tax and customs authorities.

· Assess major risks in the public procurement cycle, taking in consideration the recent developments (Central Purchasing and e-Procurement: KHMDHS and ESHDHS) and the need to have a clear governance framework. Develop strategy according to the assessment(Q4 2015)

· Implement strategy to mitigate public procurement risks.(Q1 2016)

· Assess 2 specific sectors, Health and Public Works in order to understand the existing constrains related to corruption and waste risks and propose measures to address them. Develop and implement strategy. (Q4 2015)

If actually implemented, this is extremely valuable and positive. However, there are good reasons to assume it will never be implemented. We have already seen, for instance, the attitude of SYRIZA Minister Lafazanis to protecting Public Power Corporation employees and sinecures. We also see that SYRIZA—like many other Greek parties before it—is using State Owned Enterprises to appoint its own clients.

Independence of Tax Administration

Full agreement with Troika proposals.

Greek Proposal July 9th

Troika Proposal June 26th

Adopt legislation to establish an autonomous revenue agency, that specifies: (i) the agency’s legal form, organization, status, and scope; (ii) the powers and functions of the CEO and the independent Board of Governors; (iii) the relationship to the Minister of Finance and other government entities; (iv) the agency’s human resource flexibility and relationship to the civil service; (v) budget autonomy, with own GDFS and a new funding formula to align incentives with revenue collection and guarantee budget predictability and flexibility; (vi) reporting to the government and parliament; and (vii) the immediate transfer of all tax- and customs-related capacities and duties and all tax- and customs-related staff in SDOE and other entities to the agency.

Adopt legislation to establish an autonomous revenue agency, that specifies: (i) the agency’s legal form, organization, status, and scope; (ii) the powers and functions of the CEO and the independent Board of Governors; (iii) the relationship to the Minister of Finance and other government entities; (iv) the agency’s human resource flexibility and relationship to the civil service; (v) budget autonomy, with own GDFS and a new funding formula to align incentives with revenue collection and guarantee budget predictability and flexibility; (vi) reporting to the government and parliament; and (vii) the immediate transfer of all tax- and customs-related capacities and duties and all tax- and customs-related staff in SDOE and other entities to the agency.

These are extremely good proposals if indeed they can be implemented, and if independence translates into effective and transparent governance.

Transfer Pricing and Tax Evasion

Exceeds Troika proposals.

Greek Proposal July 9th

Troika Proposal June 26th

Produce a comprehensive plan with technical assistance for combating tax evasion which includes (i) identification of undeclared deposits by checking bank transactions in banking institutions in Greece or abroad, (ii) introduction of a voluntary disclosure program with appropriate sanctions, incentives and verification procedures, consistent with international best practice, and without any amnesty provisions (iii) request from EU member states to provide data on asset ownership and acquisition by Greek citizens, (iv) renew the request for technical assistance in tax administration and make full use of the resource in capacity building, (v) establish a wealth registry to improve monitoring.

· develop a costed plan for the promotion of the use of electronic payments, making use of the EU Structural and Investment Fund;

· Create a time series database to monitor the balance sheets of parent-subsisdiary companies to improve risk analysis criteria for transfer pricing

develop a costed plan for the promotion of the use of electronic payments, making use of the EU Structural and Investment Fund;

These are extremely good proposals if they can be properly implemented. Greece has long had a problem with unreported income and offshore transactions.

· In order to foster competition and increase consumer welfare immediately launch a new competition assessment, in collaboration and with the technical support of the OECD, on wholesale trade, construction, e-commerce and media. The assessment will be concluded by Q1 2016.The recommendations will be adopted by Q2 2016.

· open the restricted professions of engineers, notaries, actuaries, and bailiffs and liberalize the market for tourist rentals;

· reduce red tape, including on horizontal licensing requirements of investments and on low-risk activities as recommended by the World Bank, and administrative burden of companies based on the OECD recommendations, and (ii) establish a committee for the inter-ministerial preparation of legislation.

Technical assistance of the World Bank will be sought to implement the easing of licensing requirements.

· design electronic one-stop shops for businesses through analysing information obligations businesses have to comply with, structuring them accordingly and helping to design a project on developing the necessary ICT tools and infrastructure (Q3 2015). Setting up the institutional & co-ordination structure, identification of the business life events to be included, identification and mapping of information obligations & administrative procedures and training of officials (Q4 2015). Launch (Q1 2016)

Adopt legislation to:

 implement all the pending recommendations of the OECD competition toolkit I, including inter alia truck licenses, and the OECD toolkit II recommendations on beverages and petroleum products;

 open the restricted professions of engineers, notaries, actuaries, and bailiffs, and liberalize the market for tourist rentals and ferry transportation;

 reduce red tape, including on horizontal licensing requirements of investments and on low-risk activities as recommended by the World Bank, and administrative burden of companies based on the OECD recommendations, and (ii) establish a committee for the inter-ministerial preparation of legislation.

Technical assistance of the World Bank will be sought to implement the easing of licensing requirements.

These are all excellent proposals and should be implemented immediately. Again, there is good reason to believe that the liberalising tendencies of the OECD and the World Bank will be anathema to SYRIZA and its supporters.

Privatisation

Full agreement with Troika proposals.

Greek Proposal July 9th

Troika Proposal June 26th

To facilitate the completion of the tenders, the authorities will complete all government pending actions including those needed for the regional airports, TRAINOSE, Egnatia, the ports of Pireaus and Thessaloniki and Hellinikon (precise list in Technical Memorandum). This list of actions is updated regularly and the Government will ensure that all pending actions are timely implemented.

The government and HRADF will announce binding bid dates for Piraeus and Thessaloniki ports of no later than end-October 2015, and for TRAINOSE ROSCO, with no material changes in the terms of the tenders.

The government will transfer the state's shares in OTE to the HRADF.

Take irreversible steps for the sale of the regional airports at the current terms with the winning bidder already selected.

To facilitate the completion of the tenders, the authorities will complete all government pending actions including those needed for the regional airports, TRAINOSE, Egnatia, the ports of Pireaus and Thessaloniki and Hellinikon (precise list in Technical Memorandum). This list of actions is updated regularly and the Government will ensure that all pending actions are timely implemented.

The government and HRADF will announce binding bid dates for Piraeus and Thessaloniki ports of no later than end-October 2015, and for TRAINOSE ROSCO, with no material changes in the terms of the tenders.

The government will transfer the state's shares in OTE to the HRADF.

Take irreversible steps for the sale of the regional airports at the current terms with the winning bidder already selected.

These privatisations, together with that of ADMIE, has constituted a red line for SYRIZA. Nevertheless, these are useful and necessary transactions (given the poor state of public management) if they are structured properly.

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